Chapter 17 – Analyze Your Supplier’s Compensation Proposals

After you successfully negotiate a compensation settlement, you need to step back and analyze any impact it will have on your business relationship with the supplier.

A Typical Supplier Proposal

Factories are usually very, very reluctant to provide any cash refunds to customers. For one thing, there are government controls in place that do not allow them to remit larger amounts of foreign currency to an overseas banking account.

Therefore, they will prefer to offer you a solution that does not involve cash. A typical proposal is to reduce the future sale price to your company for the product in question by a few cents per unit. Eventually you will receive the full value of your damages but you will have to buy a lot more product to receive it. This actually works to their advantage by keeping your company as a customer for a considerable time until the total amount has been “refunded”.

They might offer to deduct US$ 0.20 per unit from the current price of an electric toaster. If your claim compensation is US$200,000, you will have to buy 1,000,000 toasters to recover your compensation. To your disadvantage, you will be bound to that supplier for a long time and have a diminished ability to react to changes in the marketplace. If another supplier enters the market with a more competitive product, you cannot react because you are committed. Your competition will grab the opportunity and take away sales back home.

On the positive side, if you do agree to this arrangement, your factory will survive and it will improve your long term relationship with the them.

Another Supplier Proposal

A similar but slightly different proposal is compensation in the form of FOC (Free of charge) goods. This is much more difficult for the factory because they have to purchase the materials and to produce the goods at not only their own cost but also their production capacity is lost while manufacturing the goods.

Also, under some conditions this solution is restricted by Chinese regulations that do not allow FOC shipments.

In the unlikely event that you do manage to obtain a large cash refund from the factory, you can expect price increases in near future as a way for the factory to try recouping their losses.

In some cases, the factory may offer you a combination of all of these solutions, some cash, some FOC shipments, and some price reductions. You now know the impact these solutions will have on your business and can make the right decision.

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